1、 DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES,ANALYST CERTIFICATIONS,LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS.US Disclosure:Credit Suisse does and seeks to do business with companies covered in its research reports.As a result,investors should be awa
2、re that the Firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only a single factor in making their investment decision.17 June 2019 Global Equity Research Investment Strategy Global Equity Strategy Research Analysts Andrew
3、Garthwaite 44 20 7883 6477 andrew.garthwaitecredit- Robert Griffiths 44 20 7883 8885 robert.griffithscredit- Nicolas Wylenzek 44 20 7883 6480 nicolas.wylenzekcredit- Mengyuan Yuan 44 20 7888 0368 mengyuan.yuancredit- Asim Ali 44 20 7883 2480 asim.alicredit- STRATEGY Equities:Melt-up or meltdown?We t
4、ake the view that markets will be higher by year-end(c.6%upside for the MSCI AC World),but remain close to benchmark until we get more clarity around the trade war,a rise in Chinese money supply/US PMIs,a non-inverted US yield curve(3m/10y)and confirmation that earnings revisions are turning higher.
5、On balance,we think there is more risk of a melt-up than a meltdown,and find that we are more positive than most of the clients we meet.Why could there be a melt-up?i)The ERP on Credit Suisse EPS numbers remains very high(5.9%versus a warranted ERP of 5.4%)market peaks have seen an average ERP of 2.
6、3%;ii)The 13-week MA of earnings revisions has decoupled from falling PMIs,and when earnings revisions trough,markets typically rise by 13%on average,compared with c.2%so far;iii)Most of the margin improvement in the US is structural(tech,taxes and rates),while the cyclical threat of higher labour c
7、osts has diminished in the near term given the slowdown in wage growth and rise in productivity;iv)Positioning is cautious($145bn in equity outflows YTD);v)We have seen the longest spell of negative global macro surprises on record,and our base case remains that global PMIs are close to a low;vi)Cen
8、tral banks around the world are entering a new easing cycle at a time when US financial conditions are already very loose and consistent with further rises in markets.Why could there be a meltdown?i)Many US survey indicators and,most importantly,the US yield curve(3m/10y)are consistent with no GDP g
9、rowth,yet US cyclicals are pricing in ISM new orders of 64(c.2.5%GDP growth);ii)The normal lead indicators of a US recession imply a recession in Q3 2020,and markets historically have peaked 8 to 13 months ahead of a recession,although we acknowledge that apart from the yield curve,these lead indica
10、tors have proven to have very volatile lead times;iii)Trade tensions may not abate until closer to the November 2020 elections,depressing CEO confidence(which remains consistent with a fall in US capex);iv)The performance of credit and equities is closely correlated and we think credit looks vulnera
11、ble,with IG spreads at only average levels,and despite record-high US corporate leverage,IG quality is very low,with net credit downgrades;v)The US HOLT CFROI is at an all-time high.Nearly all the US RoE improvements over the past 15 years have come from taxes(with the effective tax rate at a record
12、 low),leverage(which is at a record high)and margins(at record highs).None of these will get any better,in our view;vi)US FCF has just fallen below dividends and buybacks,limiting payouts.This happened one and two years ahead of the two most recent bear markets.We would play cyclical risk by:(i)bein
13、g overweight US growth stocks(which outperform c.80%of the time the Fed cuts rates)and if there is the normal late-cycle bubble,it will be in growth stocks;ii)being overweight European(but not US)cyclicals(which are pricing in zero European growth)and the cyclical regions(GEM and Japan),where there
14、is strong valuation support.In the case of GEM equities,they tend to outperform two-thirds of the time the Fed cuts rates,while in Japan there is clear-cut evidence of corporate change.17 June 2019 Global Equity Strategy 2 Key charts Figure 1:The gap between the consensus and warranted equity risk p
15、remium remains large Figure 2:Earnings momentum has been better than macro momentum Source:Refinitiv,Credit Suisse research Source:Refinitiv,IHS Markit,Credit Suisse research Figure 3:The corporate sector has been the main buyer of equities since the market low Figure 4:US recession probability has
16、increased to 31%Source:Refinitiv,Credit Suisse research Source:Refinitiv,Credit Suisse research Figure 5:US Markit PMI manufacturing new orders imply a significant slowdown Figure 6:MSCI AC world is pricing in a rebound in global PMI new orders versus inventory Source:Refinitiv,IHS Markit,Credit Sui
17、sse research Source:Refinitiv,IHS Markit,Credit Suisse research 024681012141991199419972000200320062009201220152018US ERP on consensus EPSUS Warranted ERP-80%-60%-40%-20%0%20%40%-20%0%20%40%60%80%100%120%20002002200520082010201320162019%of countries with PMI in excess of 52MSCI AC World 13 week earn
18、ings breadth,rhs-10%-5%0%5%10%15%20%25%20092010201120122013201420152016201720182019Non-financial corporatesRest of worldHouseholdsInstitutionsCumulative buying/sellingof US equities,%Market Cap 0%10%20%30%40%50%60%70%80%90%100%196219691976198319901997200420112019Term spread implied recession probabi
19、lity 12 months forward,recessions shaded-6-4-2024630354045505560657019972002200820132019PMI manufacturing new ordersUS real GDP growth,pushed back 1Q(rhs)-40-20020406080-4-20246810121420092011201220132015201620172019MSCI AC World taken to be flat(at 512)from 10/6/2019Global PMI new ordersversus inve
20、ntoryMSCI AC World yoy%chg,rhs 17 June 2019 Global Equity Strategy 3 Table of contents Equities:Melt-up or meltdown?4 What is the melt-up case?.4 1.Valuations look much more attractive using ERP than P/E 4 2.Earnings revisions seem to have troughed 8 3.Much of the margin improvement is structural 9
21、4.Productivity growth has picked up at the same time as wage growth has slowed slightly 11 5.There is scope for asset turns to improve 14 6.A flow-less bull market 15 7.Our central case remains that we are close to the trough of global PMIs 16 8.Financial conditions are still loose and about to get
22、looser 23 9.A global monetary easing cycle 24 What are the concerns?.27 1.The US cycle looks more vulnerable than expected 27 2.The normal lead indicators of a US recession imply Q3 2020 30 3.US cyclicals are pricing in too much economic optimism 32 4.US tariffs have distorted the global cycle.33 5.
23、Corporate FCF is now below dividends and buybacks 34 6.Equity and credit are joined at the hip,and IG looks unattractive 36 7.The US has limited room to boost its profitability 38 8.Tactical indicators are merely neutral 39 What could make us go overweight equities?.41 Where to put risk on.41 Append
24、ix.44 17 June 2019 Global Equity Strategy 4 Equities:Melt-up or meltdown?We recently reduced our tactical overweight of equities to benchmark(see Protectionism what to do?,3 June)and have on the whole been more cautious on equities since February 2019(see Equities:Down to benchmark,18 Feb).We opt to
25、 remain benchmark on equities but acknowledge that this is a close call and on balance we find more arguments to be bullish than bearish(i.e.,we see more risks of a melt-up than a meltdown)and stick to our year-end target of 637 for the MSCI AC World(c6%upside potential from current levels).We discu
26、ss our view on equities in four parts:1.The positive case for equities currently;2.The concerns;3.The critical swing factors;4.Finally,we discuss why we would rather take risk via the cyclical regions(i.e.GEM and Japan),European cyclicals(where we are overweight)and US growth stocks(which we would e
27、xpect to outperform in a melt-up).What is the melt-up case?1.Valuations look much more attractive using ERP than P/E Overall,we believe real bond yields have fallen more than real GDP growth if we look at the Feds r-star(its estimate of an equilibrium real rate)versus the Fed estimate of a terminal
28、growth rate.As a result,the equity risk premium looks much more attractive than the P/E(if real DPS growth were the same as real GDP growth,then the earnings yield,the reciprocal of the P/E,would be the only driver of the ERP).The ERP(equity risk premium)=real DPS growth+Dividend yield-Real bond yie
29、ld.Figure 7:The TIPS yield has fallen much more than the GDP growth rate Figure 8:Both the TIPS yield and the equilibrium real rate have fallen much more than the Fed estimate of a terminal growth rate Source:Refinitiv,Credit Suisse research Source:Refinitiv,Credit Suisse research -4-3-2-10123456199
30、01997200420112019Real 10-year UST yield(nominal yield less 3mma core inflation rate to2003,yield on TIPS thereafter)Growth rate of US real GDP-1.0-0.50.00.51.01.52.02.53.0201120122013201420152016201720182019Longer run FOMC projections for the growth rate of real GDPLonger run FOMC projections for th
31、e real FFR(r*)10-year TIPS yield 17 June 2019 Global Equity Strategy 5 Based on our most recent investor survey(May,2019)over 40%of clients do not pay attention to the ERP,and hence we believe a substantial proportion of investors may be undervaluing equities.We have two ways of assessing the equity
32、 risk premium.First,by using IBES numbers on that basis,the ERP is c.6.6%(or closer to 6%on our more conservative medium-term EPS growth assumptions).This compares with a warranted ERP(based on credit spreads and ISM)of 5.4%.Figure 9:The gap between the consensus and warranted equity risk premium re
33、mains large Figure 10:Model details Source:Refinitiv,Credit Suisse research Source:Refinitiv,Credit Suisse research Second,we can proxy earnings expectations by looking not at IBES(which began in 1990),but by using nominal GDP growth(in this instance 10-year trailing to proxy EPS growth).Using this
34、approach suggests that the ERP has on all but one occasion troughed below its 20-year average.At market peaks,the ERP has on average declined to 2.3%versus 3.7%now,and on many occasions it has fallen to just 1%.Figure 11:Our long-term ERP proxy indicates a lower ERP than using IBES numbers Figure 12
35、:ERP at market peaks Source:Refinitiv,Credit Suisse research Source:Refinitiv,Credit Suisse research 024681012141991199419972000200320062009201220152018US ERP on consensus EPSUS Warranted ERPModel inputsCoeff.t-valueCurrentUS lead indicator-dev.from trend-27.8-6.9-0.04%BAA corp.bond spread1.412.12.3
36、9Model outputUS warranted ERP(consensus,operating)5.4Current ERP on consensus EPS6.6ERP on Credit Suisse EPS5.9Post-1991 average5.3RSQ0.70Intercept1.99-5%0%5%10%15%20%189119061922193819541970198620012017ERP proxy(earnings yield x 45%payout ratio-bond yields+10-year trailing nominal GDP growth)20-yea
37、r moving averageEquity market peaksMarket PeakERP Proxy at market peakOct-291.0%Feb-371.5%Jul-566.0%Dec-612.1%Nov-682.9%Jan-733.1%Aug-872.4%Mar-000.9%Oct-071.0%Mean2.3%17 June 2019 Global Equity Strategy 6 In addition,the ERP in other regions also remains too high.In GEM,the ERP is above 9%,while in
38、 Continental Europe it is 8.6%,against a warranted value of 7.3%.Figure 13:The GEM ERP remains high Figure 14:The Continental European ERP remains very high,and well above our warranted level Source:Global EM equity strategy,Credit Suisse research Source:Refinitiv,Credit Suisse estimates We would su
39、ggest that in the long term some non-macro factors should also contribute to a fall in the equity risk premium.In particular,we highlight an increased alignment between management and shareholder interests owing to ESG,activism,more executive share options and better-quality accounting.Other valuati
40、on methods On a 12-month forward PE basis,US equities are trading close to their 30-year average,while Global ex-US equities are trading significantly below their average.Figure 15:12m fwd P/E in US is only middling Figure 16:Outside of the US,the forward P/E is still low,as is the Shiller P/E Sourc
41、e:Refinitiv,Credit Suisse research Source:Refinitiv,Credit Suisse research 4567891011122000200220042006200820102012201420162018EMF$ERP over UST(%)23456789101119982001200420072010201320162019European warranted ERPEuropean ERP510152025198519891993199720012005200920132017S&P500 12mforward PE79111315171
42、92123251990199319961999200320062009201220152019World ex US:12-month forward PE 17 June 2019 Global Equity Strategy 7 A similar divide is apparent if we look at multiples on a Shiller basis.In passing,we think the message of Shiller PE is being misinterpreted.We think it is saying that equity returns
43、 ought to be around 30%below their historical norms,not that equities are 30%expensive(see 2019 Research Outlook:Equities,Regions and Macro for more details).Figure 17:The US Shiller PE is well above that of the rest of the world Source:Refinitiv,Credit Suisse research While the US multiple is clear
44、ly well above that of the rest of the world,it does not seem anomalously high when compared to its typical macro drivers.When we look at a simple two-factor PE model driven by TIPS and ISM,the US market appears close to fair value.Indeed,the recent decline in the TIPS yield has created modest upside
45、 to the fair value PE from here.Figure 18:A simple two-factor model suggests equity is fairly valued Figure 19:Model details Source:Refinitiv,Credit Suisse research Source:Refinitiv,Credit Suisse research 5101520253035404519851989199419992004200920142019US:Shillers P/E=30.2xGlobal ex US:Shillers P/E
46、=13.7x-1.50.52.54.56.58.513.014.015.016.017.018.019.0Jan-15Sep-15Jun-16Mar-17Nov-17Aug-18May-19Gap,rhsS&P 12m fwd PEModel(TIPS,ISM)12m fwd PECoefficientt-valueLatestTIPS yields-1.76-5.960.42ISM manufacturing new orders0.137.7552.70Intercept10.33Model16.4R260%Actual16.1Upside/downside1.8%17 June 2019
47、 Global Equity Strategy 8 2.Earnings revisions seem to have troughed Usually earnings revisions improve as the global cycle turns(as proxied by the percentage of PMIs in excess of 52),and in turn that correlates very closely with market performance.There is something of a gap between the percentage
48、of PMIs in excess of 52,which has turned down,and earnings revisions,which have not.In this instance we think earnings revisions are right.Figure 20:Earnings momentum has been better than macro momentum Source:Refinitiv,IHS Markit,Credit Suisse research Moreover,data from our US Equity Strategy team
49、 below implies earnings are in line with their cycle norm(i.e.they normally are revised down at this stage in the quarterly earnings cycle).Figure 21:Global earnings revisions correlate to the year-on-year change in market performance Figure 22:The US Q2 earnings cycle is following its seasonal norm
50、 Source:Refinitiv,Credit Suisse research Source:Credit Suisse US Equity Strategy research Historically,after earnings revisions turn,markets have been up 80%of the time over the next 12 months by an average of 13%.This time it has been only 1.9%.-80%-60%-40%-20%0%20%40%-20%0%20%40%60%80%100%120%2000